Brexit Shocks Asia

On Friday, the British pound sank to a 30-year low against the US dollar and the euro posted its biggest ever fall as markets reacted negatively to Brexit. In Asia, the Japanese yen hit its highest level in more than two years and the gold price soared, while Asian stocks posted their biggest decline in five years and currencies of commodity exporters such as Australia tumbled.

The MSCI Asia Pacific index of stocks dropped by 4.3 percent in Friday afternoon trading, with Japanese shares down by 7.7 percent and Hong Kong equities falling by 4.3 percent, while the Bloomberg Commodity Index fell by 1.6 percent. Meanwhile, the Chinese renminbi dropped to its lowest level against the dollar since 2011.

“All hell is breaking loose,” Vishnu Varathan, a senior economist in Singapore at Mizuho Bank, toldBloomberg News. “The only surefire is you buy yen, you buy U.S. Treasuries, you buy gold, and you sit tight.”

The negative reaction from financial markets followed earlier expectations that the “Remain” camp would narrowly win the June 23 referendum on EU membership, leading to a mini-rally in currencies and stocks ahead of the vote. However, this was rapidly reversed after poll results trickled onto brokers’ trading screens Friday morning in Asia.

The “Leave” side reportedly won the vote by around 52 percent to 48 percent, with the pro-Remain voters in London, Scotland and Northern Ireland unable to counter the majority Brexit supporters in England.

The Economist Intelligence Unit has predicted leaving the EU would spark a recession and cause real GDP in the world’s fifth-largest economy to drop by 6 percent by 2020, with the British currency seen plunging by up to 15 percent against the dollar.

Asian Reaction

Japanese Finance Minister Taro Aso told reporters Friday the Japanese government would take “firm action on the yen if needed” to reverse the sharp appreciation in the Japanese currency, which is seen as contrary to the goals of Abenomics.

Bank of Japan governor Haruhiko Kuroda also said the central bank “stands ready to provide sufficient liquidity [to financial markets], including swap lines among six central banks, to provide stability to the market.”

Yet despite the official statements, the yen hit 99 against the dollar in Friday trading, as traders sought the traditional “safe haven” asset.

Australian Prime Minister Malcolm Turnbull said he expected further volatility as markets weighed the impact of Brexit, although its direct effects could take longer to materialize.

“The impact on Australia immediately, directly, from a legal point of view, will be very limited because it will take some years for the United Kingdom to leave the European Union, to negotiate an exit,” he said.

“However, we’ve seen already large falls on stock markets and there will be a degree of uncertainty for some time.”

As noted previously by The Diplomat, China had backed Britain remaining in the EU, noting that it would lose its position as a gateway to the broader European market should it exit. Britain has been the largest recipient of Chinese foreign direct investment in Europe in recent years, with Chinese billionaire Wang Jian-lin warning during a recent visit that Chinese companies could consider moving their headquarters elsewhere in the event of Brexit.

ANZ Research analysts Raymond Yeung and David Qu said Friday that Beijing could exercise both its conventional and unconventional monetary policy tools in the wake of the vote.

“Although the Brexit result is unlikely to affect China’s immediate economic outlook, the event reminds us that we are still penciling in one more additional RRR [reserve requirement ratio] cut,” they said.

“China can exhibit its status as a global citizen and signal its willingness to lift market sentiment due to Brexit. This morning we have seen a significant increase in market volatility globally and we would not overlook any [central bank] action this weekend.”

Japanese automakers including Nissan and Toyota have warned against the impact of Brexit, given that more than 1,000 Japanese firms currently invest around $13 billion a year in Britain.

India, currently the second-largest source of foreign direct investment, has also urged against Britain leaving the world’s largest economic bloc.

But while exports to Britain only account for an estimated 0.7 percent of Asia’s GDP, the broader effects could be more significant. Japan’s Mizuho Research Institute has estimated that a stronger yen could dampen Japanese exports, reduce business investment and contract Japan’s GDP by up to 0.8 percent – enough to send an already fragile recovery back into borderline recession territory.

In addition, Mizuho warned of potential tariff barriers between Britain and the EU, while restrictions could be placed on the movement of people and goods between Britain and the continent.

“You’re going to see a big risk for trade, further appreciative pressure on the Japanese yen which is already causing some problems. And the more deflationary pressure on the Japanese economy [the worse],” Michael Ingram, market strategist at BGC Partners, told NHK World prior to the vote.

“It’s always difficult to put a timescale on this…but we could easily see a 10 to 20 percent downside playing out in the event of a Brexit.”

For a world economy already struggling to revive, British voters have delivered a political growth shock that will prove hard to immediately overcome. The prospects of political as well as economic integration in Asia now appear to have taken a dive, while the pressure is now back on the region to pick up the slack and revive moribund world markets.